What is Forex Trading - The Definitive Guide
What Is Forex Trading, and how can you get started?
We’re going to show you exactly what is Forex Trading, cover the ins and outs of this exciting market, let you know how to get started on your own trading journey into Forex, make you aware of the pitfalls and traps of the Forex market and how you can be part of this $6 trillion a day market.
Below is a summary of everything you’re about to learn to take you from “Zero to Pro” on your trading journey.
“What is Forex Trading” (this page) is Part 1 of our Free 9 Part Forex Trading Guide.
Let’s get started:
What is Forex Trading?
Have you ever exchanged currency to go abroad? If you did, whether you knew it or not, you were Forex Trading.
This currency exchange process is essentially the same thing as forex trading, done at a physical location, mostly for holidaymakers to get their hands on local currency, normally at an airport.
Forex Trading Online with a broker is done at a much greater level and done to make a profit from the difference in exchange rates.
What is Forex? A similar process to a “currency exchange”
When trading currency pairs (Forex) the principles remain the same, however, there are many items in place to make it much more efficient.
What’s even more appealing is they’re available to you, right now.
In the world of trading, Forex can be known as several other names, although typically “Forex Trading” is the most popular term. It is also known as:
- Foreign Exchange
- Foreign Exchange Trading
- Currency Trading
- Spot Forex Trading
- FX Trading
… or simply, “FX”.
Essentially all of these terms describe the same thing, The Forex Market. Most “non-traders” will associate Forex Trading with exchanging money at an airport.
As you’ll see, this $6.6 trillion a day industry is more than just an airport money exchange service. Forex Trading impressively eclipses all other trading types.
Serious money is made trading the Forex Markets, making Forex Trading serious business.
What is forex trading all about?
Okay, so we now know the basics of “What is Forex Trading” let’s jump into the “Why”.
Is it about finding your inner self?
Is it about an understanding of how currency markets provide a global trading equilibrium?
Is it about becoming a better person?
I don’t think so …
Ultimately Forex Trading is about making money.
It is as simple as that. And that is precisely why you are here…
A successful trade is a winning trade, a winning trade makes money.
So, although the journey to trading mastery is a long one, it’s also a logical one and if you find a method or strategy that works for you, use it.
On this topic, questions often asked by aspiring traders are:
“What kind of trading approach should I use?”
“Should I start day trading, swing trading, position trading?”
“How many indicators should I use?”
“Should I follow the TV news channels?”
If you are facing a similar dilemma, let’s make an analogy.
If you were attacked in a dark alley and you felt that your life was in real danger what kind of defence technique would you attempt to use.
Would you attempt to kick your assailant with some fancy kung fu move that you saw in a movie?
Or would you use some basic but brutally effective “knee to the groin”, “thumb to the eye” technique that is easy to implement and that you are 100% certain will have an effect?
When you have your hard-earned money riding on your trades maybe your life is not at stake by you and your family’s livelihood is.
Advantages of Forex Trading
Understanding the advantages of the Forex Market over other trading types will help you see why this market is so popular.
We’ve mentioned that Forex Trading has huge volumes traded daily, but what other reasons is the Forex Market so popular for traders?
Trading Forex comes with many unique advantages:
Advantages of Forex Trading
- Forex market has the largest size and liquidity throughout the world. No single entity can control the market for a long period of time
- You can trade 24 hours a day (except weekends). Trading starts at Monday 7am New Zealand time and closes at 5pm New York time on Friday
- Forex trading is suitable for small investors. You do not need thousands of dollars to start trading
- It does not matter if the market is going down, you can make money whether the market is going up or down
- The use of leverage gives you the advantage to enhance your profit. You can a 1,000 unit currency position with $10
- Technical analysis works very well, much of the market can be viewed as a self-fulfilling prophecy
- You can open a free demo account with most brokers to gain experience or test your trading system
It does not matter if the market is going down.
The use of leverage gives you the advantage to enhance your profit. You can a 1,000 unit currency position with $10Technical analysis works very well, much of the market can be viewed as a self-fulfilling prophecy you can open a free demo account to gain experience or test your trading system
📉 We buy when the price is low and sell back when the price rises. 📈
📈 We sell when the price is high and buy back when the price drops. 📉
Price changes are caused by economic and political events around the world.
Global Economic Policy Uncertainty Index, January 1997 – October 2020
Each event affects market confidence, increasing or decreasing the demand for assets.
In turn, this makes any event occurring worldwide a tradeable opportunity, on a daily basis.
So in summary, the foreign exchange market (Forex, FX, or Currency Market) is a worldwide, decentralised, over-the-counter financial market for trading currencies.
It is the largest financial market in the world with a volume of over $1.5trillion a day worldwide*. Total forex trading volume is well over three times the total of the stocks and futures markets combined.
Financial centres around the world function as anchors of trading between a wide range of buyers and sellers. Indeed, forex transactions are already a part of our life.
For example, you exchange your money into another foreign currency when you go abroad to spend your holiday. Buying things online from another country is another example.
Although Forex is not a new business, it is becoming more popular recently due to several advantages it provides to investors.
With the 2020 Global Pandemic, working from home drove the popularity of forex trading for many reasons, the ability to trade from home (or your mobile phone) and the volatility of the markets brought about by the pandemic.
Of course, the growth of forex trading goes together with more tools becoming available for both long-term and short-term traders, and of course the development of internet speeds (including 5G connectivity) allowing traders fast access to global markets.
With all of these elements, forex trading has become much easier for retail traders. You can just sit in front of your computer and trade world currencies from the comfort of your home.
The foreign exchange market has unique advantages and there are several reasons to start forex trading:
Forex market has the largest size and liquidity throughout the world. No single entity can control the market for a long period of timeYou can trade 24 hours a day (except weekends). Trading starts at Monday 7am New Zealand time and closes at 5pm New York time on FridayForex trading is suitable for small investors. You do not need thousands of dollars to start tradingIt does not matter if the market is going down, you can make money whether the market is going up or downThe use of leverage gives you the advantage to enhance your profit. You can a 1,000 unit currency position with $10Technical analysis works very well, much of the market can be viewed as a self-fulfilling prophecyYou can open a free demo account to gain experience or test your trading system
The History of Forex
Traditionally, retail investors’ only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.
There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centres of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
In the foreign exchange market, there is little or no ‘inside information’. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
The Nature of Forex Markets
Forex markets are incredibly exciting and appetising. There is ALWAYS an opportunity.
Always Open: Forex Markets are open 24 hours a day, 5 days a week.
Huge Trading Volume: Daily global trading volume over $6 trillion USD
Daily currency trading volumes rise to $6.6 trillion, source: Bloomberg
The term Forex means ‘Foreign Exchange’ – trading currencies against each other.
But Forex trading is much more than that!
We can trade all financial assets, currencies, commodities, like Oil and Gold and stocks, without having to own them and with a small amount of capital.
Let’s see how.
Forex Market Participants
Commercial Traders:
Large corporations trade on the FX market to control revenues and expenses incurred in various currencies through hedging whereby a trade or multiple trades are opened in order to try and minimize the losses in other trades.
Speculative Traders:
Investors trade currencies for profit. Most forex trading is speculative by analyzing the market and political news (fundamental analysis) and/or studying the chart history of an instrument (technical analysis). Unlike other asset markets, in forex, it is possible to profit from a currency losing value as it is from the currency rising in value.
What Makes Forex Trading Unique?
- CFD Trading: Contract for Difference (CFD) enables trading on price changes without having to own a financial asset, physically.
- Leverage: Leverage magnifies our available capital to open larger positions, increasing both profit and risk amounts for every price movement.
- 5/24 Open: The digital nature of Forex allows the inclusion of a major stock market from each continent, keeping the market always open for traders.
- Two-way Market: Long (buy) and Short (sell) positions allow profiting both when the prices rise, and when the prices fall.
- Hedging: Due to the two-way market, you can create advanced trading strategies hedging your buy and sell positions with ease.
- High Liquidity & Volatility: Millions of traders act simultaneously at all times, keeping the costs low and causing constant price changes.
- A Wide Range of Assets: Forex traders can invest in currency pairs, commodities, equities, stock indices, cryptocurrencies, exchange-traded funds (ETFs), and bonds.
What Is CFD Trading and How Does It Work?
CFD means “Contract for Difference” and is a financial derivative instrument.
In Forex markets, we trade everything as CFDs, so we don’t have to physically purchase assets.
Imagine buying 10 barrels of Crude Oil, to trade.
We would have to carry the barrels home!
Then, find a buyer, transport the barrels and collect the money.
And repeat this EVERY. SINGLE. TIME.
Yep – that’s why we prefer CFDs.
CFD trading allows us to benefit on price changes without all that extra hassle.
And with the convenience of technology and the Internet, from our computer, laptop or mobile phone we can trade.
This innovative advantage is brought to us by Forex brokers.
What Is a Forex Broker?
Forex trading happens via online brokers.
We use our broker’s trading platform to give Buy and Sell instructions electronically.
Then, usually, instantly, they transmit our instructions to the order execution venues.
Brokers usually offer a wide range of trading tools and services:
- Trading Platforms: accessible from the computer desktop, web browser or mobile device
- Asset Selection: a wide range of assets to trade on the platform
- Leverage: a financial tool which multiplies our capital, allowing larger trades
- Customer Service: account management and trading education materials
- Market Analysis: economic calendar, market commentary and trading signals
- Trading Tools: A range of plugins or tools to make trading easier for the retail client, giving access to professional tools
- Education: their own training programs
Forex brokers usually do not manage traders’ portfolios because financial regulations prohibit them from conducting trading activities for clients.
What Is a Forex Trading Platform?
A Forex trading platform is our door to the financial markets.
It’s, essentially a tool that allows us access to trade, different brokers license different trading platforms, however, almost all brokers have the most popular tools.
Within the trading platform, we follow the prices of financial assets and Buy or Sell them.
A trading platform usually contains:
- Asset Lists – Buy and Sell prices, asset specifications, trading condition
- Trading Orders – Market orders, Take Profit and Stop Loss orders, pending orders
- Analysis Tools – Live price charts, interactive chart tools, technical indicators
- Account Information – Balance, margin, equity, open profit/loss
The most common Forex trading platforms are:
